Disappointing jobs report puts June rate hike in question

May 09, 9:04 am
US Jobs

The April employment report released on Friday, May 6th by the Bureau of Labor fell short of expectations. The US economy added 160k jobs in April, the lowest pace of monthly job growth in seven months. Average hourly earnings in April stagnated, rising 0.30% on the month, same as in March, but the year over a year saw an increase to 2.50% from 2.30% in March. US unemployment rate was steady at 5.0% however, holding on for the second month in a row. Previous two months job revisions saw 19k job losses.

Monthly Nonfarm payrolls - April 2016 (Source: Forexfactory.com)
Monthly Nonfarm payrolls – April 2016 (Source: Forexfactory.com)

The report came after April ISM surveys showed a contraction in the manufacturing sector while the non-manufacturing sector continued to post strong gains. In April, the ISM PMI on manufacturing slipped to 50.8 after rising to 51.8 in March. ISM non-manufacturing PMI, however, gained, rising to 55.7 in April, extending March’s gains of 54.5.

While the headline print on the jobs report clearly lacked an upside surprise, it is too early to throw in the towel that the US economy is slowing for good, despite the first estimates on the Q1 growth showing a 0.50% quarterly increase in GDP. However, the April jobs report has certainly dented expectations even further that the Fed will move in June. The markets now expect to see a full 25bps rate hike only by mid-2017, citing the June 23rd Brexit referendum and the US general elections in November this year, which are two big events that will make the Fed take a cautious approach.

Wells Fargo chief economist John Silvia said “This 160,000 is more consistent with the slower pace of the economy. May be the aberration is not this month, but the prior six months” after the release. The prior months saw the US jobs growth pick up steam with an above 200k trend being sustained. However, despite the drop in the monthly pace of employment, many believe that the US economy can continue to grow. Fed officials, in early December, noted that the US economy needs to add an average of 80k – 150k jobs per month to keep the jobs growth coming. Focus, therefore, shifts to the average hourly earnings amid a decline in the growth of jobs, which so far has failed to impress.

Market Reaction to April NFP Report

Following the release, the US stocks managed to post modest gains on Friday, but however closed the week on a downbeat note while the 10-year Treasury note fell for the second straight week, closing Friday at 1.779%. The US Dollar Index slipped to 93.27, marking a session low but managed to close higher on Friday at 93.88 marking a five-day winning streak after falling to an 18-month low earlier last week. Looking ahead, US data this week includes retail sales which is expected to show a pickup in sales, forecasted to rise 0.60% on the headline but the core retail sales is expected to slip 0.30%. The data comes ahead of the monthly inflation data due on May 17th.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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